Supreme Court finds no doctrine of merger in commercial property policy

The Supreme Court has now considered an insurer's liability for multiple events occurring in the same policy period, addressing policy interpretation, the doctrine of merger, and the indemnity principle: Ridgecrest NZ Limited v IAG New Zealand Limited [2014] NZSC 117, on appeal from the decision of the Court of Appeal in July 2013.

Ridgecrest owned a commercial building in central Christchurch, which was insured with IAG under a State "Businesspack" policy. As a result of the Canterbury earthquake sequence, Ridgecrest lodged four claims for earthquake damage, following earthquakes on 4 September 2010, 26 December 2010, 22 February 2011 and 13 June 2011. Each of those "happenings" occurred in the same policy period, and each claim was accepted by IAG.

The parties agreed that the building had suffered successive losses as a result of what the Court defined as the "earlier earthquakes," culminating in the building needing to be replaced as a result of the "final earthquake." Whether the final earthquake was the 22 February earthquake or the 13 June earthquake was not able to be resolved in this appeal.

The Court considered three questions:

Whether the policy required the insurer to make payments in relation to the earlier earthquakes as well as the final earthquake; Whether the losses resulting from the earlier earthquakes should be treated as merged or subsumed in the losses caused by the final earthquake; and Whether Ridgecrest's claim is precluded by the indemnity principle. It held that, on construction of the particular policy wording,Ridgecrest was entitled to be paid for the repairable damage resulting from the earlier earthquakes, up to the limit of the sum insured in respect of each earthquake. Ridgecrest was also entitled to be paid for the loss caused by the final earthquake, again up to the limit of the sum insured.

The Court then considered whether the doctrine of merger should apply, which had not been considered by the Court of Appeal. Merger is basically the margining of a prior partial loss into a subsequent total loss.

After canvassing the leading marine insurance cases on merger, and several authorities on the doctrine of merger in non-marine insurance contexts, the Court concluded that the merger principle is just a component of marine insurance contracts. The State "Businesspack" policy differed in material respects from the marine insurance policies at issue in the merger cases.

The Court held that there was no merger of...